Felix Salmon

Peter Conti-Brown has a new paper proposing the creation of what he calls a Fat Tail Risk Metric, or FTRM. The paper itself is flawed, and the details of how it’s constructed would need to be reworked from scratch. But conceptually, the FTRM I think is a good idea. Here’s Conti-Brown’s abstract:

The paper proposes a legal solution that will create a more robust metric: require mandatory disclosure of a firm’s exposure to contingent liabilities, such as guarantees for the debts of off-balance sheet entities, and all varieties of OTC derivatives contracts. Such disclosures—akin to publicly traded corporations’ filing of 10-Ks with the SEC—will allow regulators and researchers to approximate an apocalyptic, black-out, no-bankruptcy-protection and no-bailout scenario of a firm’s implosion; force firm’s to maintain daily record-keeping on such obligations, a task which has proved difficult in the past; and, most importantly, will open up a crucial subset of data that has, until now, been opaque or completely invisible.

Conti-Brown’s method for coming up with the FTRM involves adding up a firm’s total netted derivatives exposure; the size of its off-balance-sheet vehicles; and its liabilities. That gives a total-risk measure; the FTRM itself is the log of that figure.

There are lots of problems here. For one thing, netting derivatives exposure effectively eliminates an enormous amount of counterparty risk. For another thing, it’s impossible to calculate: if I write a call option on a stock, there’s no limit to how much my contingent liability might be, because there’s no limit to how far that stock can rise. And off-balance-sheet vehicles are just one of a potentially infinite line of entities which remove a company’s legal liability, but where the firm can still end up paying out a lot of money in practice. Think, for instance, the money which Bear Stearns threw at its failed hedge funds, or the money which banks used to make whole the people who invested in auction-rate securities. Those things don’t look like bank liabilities, or even contingent liabilities, until it’s far too late.

But put all that to one side: one thing which doesn’t currently exist, and which would be very useful indeed, is some kind of measure of the total amount of risk in the financial system. A lot of people had a conception, pre-crisis, of some kind of law of the conservation of risk: that tools like mortgage-backed securities simply moved risk from banks’ balance sheets to investment accounts, and therefore, at the margin, actually dispersed risk and made the system safer. What was missed, however, was the fact that total risk was increasing fast, especially as house prices rose and the equity in those houses was converted into financial assets through the magic of second mortgages, cash-out refinancings, and home-equity lines of credit.

Some types of risk are more dangerous than others, of course: if there’s a stock-market bubble, then it’s easy to see that the total value of the stock market, which is the total amount that can be lost in the stock market, has risen a lot. But stock-market investments are a little bit like houses without mortgages: where there’s very little leverage, there’s also relatively little in the way of systemic risk. It’s rare to suffer great harm from the value of your house falling if you don’t have a mortgage.

Still, stock-market bubbles can cause harm, and it’s worth including equities as part of the total risk in the system, along with bonds and loans. That’s one metric which macroprudential regulators should certainly keep an eye on; Conti-Brown’s idea is then basically to try to disaggregate that risk on a firm-by-firm basis, to see which companies have the most risk and to see how concentrated the risk is in a small number of large institutions.

It won’t be easy to do that — indeed, it will be impossible to do it with much accuracy. But even an inaccurate measurement will be helpful, especially if it becomes a time series and people can see how it’s been changing over time. It’s good to know how much risk is out there — and it’s better to know that financial institutions themselves are keeping an eye on that number, and trying to measure it as part of their responsibilities to their regulator.

I’m in England right now, spending more time going on walks and eating oysters than trying to keep a close eye on financial markets. But the one thing that has been screaming out at me, from the headlines on BBC radio to the front page of the Independent, is the idea that the fall in global markets is a direct consequence of a deepening crisis in the eurozone, and fears that default risk might be spreading from Greece to Portugal and elsewhere.

This is all par for the course when it comes to financial journalism, but that doesn’t make it any less annoying. The fact is that the fiscal status of the Eurozone countries has not changed, and that if people are more worried about such things than they were a few weeks ago, that’s because of the action in the markets, as opposed to the action in the markets being caused by some kind of spontaneous uptick in generalized concern.

It’s pretty clear which way the causality is running: markets fall, and journalists, who believe that there’s always a reason for such things, look around to see what people are talking about. When it turns out that they’re talking about the likes of Greece and Portugal, they have their headlines: “markets fall on eurozone fears” or the like. But if the markets had gone up instead, and people had been having the same conversation, you’d never see a headline saying “markets rise on eurozone fears”.

So it’s truly wonderful to see my very own Reuters come out with a much more sensible piece of analysis on Friday. Here’s Jeremy Gaunt and Natsuko Waki:

Data held by State Street contains no obvious evidence of an institutional exit from euro zone assets; the flows which are occurring appear to be no more defensive than those being seen elsewhere during a period of risk aversion for financial markets around the world…

Recent falls by the euro may be unrelated to worries that worsening fiscal problems in the euro zone’s weaker members could eventually drive them out of the zone.

The euro has fallen about 4.5 percent against the dollar this year. Euro zone stocks have been battered, with the MSCI Europe exUK index down 6.9 percent for the year.

But many of the moves made by big investors have fit in with other trends. MSCI’s all-country world index is down 6.7 percent.

The key here is to stop looking at day-to-day movements, especially in stock markets: they mean nothing. And if you do look at them, whatever you do don’t try to explain them. Stocks are cheaper now than they were last week: if you’re thinking of buying stocks that’s probably a good thing, and if you’re thinking of selling stocks that’s probably a bad thing. End of story. And as for the eurozone, it has big problems today, and it had big problems last year, and it will have big problems next year. Sometimes there’s a lot of chatter about those problems. And sometimes markets move. But let’s not pretend that there’s some strong correlation between the two.

This event — Hank Paulson being interviewed by Jeffrey Immelt at the 92nd Street Y on February 18 — might just have got a lot more interesting:

On Sept. 15, 2008, the day Lehman Brothers declared bankruptcy, Paulson says he was “startled” when Immelt came to his office and told him GE was finding it “very difficult” to sell short-term debt “for any term longer than overnight.” A day earlier, GE sent investors a letter saying its ability to sell commercial paper was “robust.” Immelt, in a statement issued Friday by GE, said he “does not believe” the two discussed problems with GE commercial paper on Sept. 15, or in one previous talk.

If correct, the portrayals in Paulson’s book, “On the Brink: Inside the Race to Stop the Collapse of the Global Financial System,” could spell trouble for GE in court, where shareholders are accusing Immelt and other executives in civil suits of violating securities laws by misleading investors in fall 2008 about GE’s finances and withholding key information.

Now, what are the chances that Immelt will bring up the discussion he had with Paulson on September 15? It would be really amazingly wonderful if the mogulfest turned into a substantive disagreement with millions of dollars at stake, with Paulson standing by his book and saying that Immelt had complained about illiquid CP markets, and Immelt denying the allegation.

But frankly it strains credibility that Immelt would have had a meeting with Paulson on that particular day and said anything else: this was hardly the time to be paying social calls. As a result, I suspect that Immelt won’t raise the subject — just as Paulson, in his book, never raises the subject of his scandalous meeting with the Goldman Sachs board in June 2008. If the likes of Immelt and Paulson had their way, no one would ever ask any tough questions at all, at the 92nd St Y or anywhere else.

(HT: Bishop)

I was expecting Lloyd Blankfein’s bonus to be small this year, but I wasn’t expecting it to be as small as $9 million: a mere 7 figures.

This is a great move by Goldman, not just from an external public-relations perspective, but also from an internal point of view: the small bonus for Blankfein makes it really hard for anybody else in the company to complain that they’re being underpaid.

Goldman is also lucky that the Couric Rule, under which public companies would need to disclose how much their highest-earning employees are making, is still not in force, although it does seem to be on its way. If Goldman were forced to say how many of its employees are making substantially more money than the CEO, and how much the top earners are bringing down, this latest piece of high-profile underpayment would probably feel less impressive.

Of course, $9 million is still an enormous amount of money for any one person to earn in one year, and Blankfein made many times that sum as his holdings of Goldman Sachs stock appreciated over the course of 2009. He’s still comfortably in the realm of the plutocrats. But in a way that’s the point: you don’t need to be paid $50 million-plus to be a master of the universe. Blankfein is one of the kings of Wall Street no matter how much or how little he’s paid. And maybe, just maybe, Goldman Sachs is coming to the realization that its senior executives won’t leave after all if their bonuses are cut to the merely enormous from the utterly obscene.

If you’re snowed in this weekend, I can highly recommend Moe Tkacik’s monster essay reviewing most of the foremost recent crisis books. It’s 8,000 words long, but it’s worth it: Moe put a lot of effort and feeling into this piece, and it shows. For instance, here she is on Gillian Tett, and her glorification of the people who invented the synthetic collateralized debt obligation:

Not content with her own seventy-odd uses of the word “innovation” and its variations over the course of 253 pages, Tett herself likens the team’s invention to “splitting the atom,” “cracking the DNA code”, “the banking equivalent of space travel” and the “financial equivalent of the Holy Grail.” Blythe Masters, a posh 25-yearold who would over the next few months take credit for inventing the credit default swap, would rave later that the concoction of sophisticated new “products” appealed to her not only because of her quantitative background, “but they are also so creative.” And finally: “I’ve known people who worked for the Manhattan Project, and for those of us on that trip there was that same kind of feeling at being present at the creation.”

And here she is on Neel Kashkari:

Former deputy Treasury Secretary Neel Kashkari, when in high school, filled most of his senior yearbook page with a large photo of a Ferrari, superimposing a picture of himself and assorted heavy metal lyrics. Recognition of the disaster’s potential magnitude did not convert to concern, however; according to David Wessel’s book, In Fed We Trust, in early 2008 Kashkari jestingly likened it to the Iran hostage crisis that consumed the 1980 election year, advising colleagues that mortgages, like hostages, were a problem for the “next president.” (A slightly different account in Too Big To Fail has Kashkari reversing this stance, urging Paulson to start lobbying to use federal funds to bail out the mortgage market lest the history books accord Obama all the credit for “bringing home the hostages.” I’m not sure which story makes Kashkari look like a bigger douchebag.)

Tkacik’s review comes from The Baffler, a truly wonderful magazine which you should find and buy; the current issue’s trenchantly leftist take on the financial crisis provides a refreshingly fresh perspective on a subject which can too easily feel very tired. And it has 5,300 words on Thomas Kinkade, too! What’s not to love?

Brett Arends is in London, and, like most visitors, is shocked at the prices for everything from taxis to houses.

If London real estate is buoyed by the uniqueness of the town’s economy, there is a disturbing degree to which the reverse is also true. This is a ridiculously expensive city to visit. I seem to hemorrhage money with every step I take. I was wondering, as I got out of a taxi the other night and severed the requisite two limbs to pay the fare, how I ever afforded to live here all those years.

The answer is, I couldn’t—even though I earned a perfectly good salary. What made a difference was the money I made on my apartment, which doubled in value between 1997 and 2003. Two years after I sold it, in 2005, it had nearly doubled again. Remove this alchemy from the equation of ordinary Londoners, and the bars and restaurants and theaters would be a lot emptier.

It’s not clear to me how living in an appreciating apartment makes it easier to spend money on bars and restaurants and theaters. In the UK, which was never big on home equity lines of credit, Arends could live off his house-price appreciation in essentially one of three ways. Either he could do periodic cash-out refinancings, or else he could take out an occasional second mortgage, or else he could simply rack up revolving credit and personal loans, safe in the knowledge that he could pay off all that debt when he sold his house and moved back to the US.

All of which helps explain the enormous rise in personal debt in the UK: essentially a very large segment of the homeowning population embarked on a mass conversion of home equity to personal debt over the course of the past decade. Since debt is more liquid than home equity, and since liquidity is a key ingredient of bubbles, house prices started soaring unsustainably.

On the other hand, the UK avoided two aspects of the US bubble: the originate-to-distribute business model, which destroyed underwriting standards; and the soaring ratio between the cost of buying and the cost of renting, which is a huge incentive to default when your home equity drops below zero. What’s more, a lot of the housing bubble in central London, as Arends notes, is a function of properties “bought up by tycoons from Russia, the Middle East and elsewhere”. Those tycoons tend to pay cash, and a bubble without debt is relatively harmless.

Arends asks in his piece whether the crisis is really over, or whether there are other bubbles — like London property — which have yet to really burst. It’s a germane question, and I suspect that his worries are well founded, and that there’s a lot more crisis yet to come. My feeling is that there probably is. On the other hand, the next stage of the crisis might well be slow and protracted, as in Japan, rather than chaotic and devastating, as in 2008. The main difference, I think, lies in default rates. If international capital markets are rocked by another big wave of defaults (Greece, or Spain, or California, or commercial real-estate, say), then we could easily slide back into chaos. On the other hand, if all we see is a long and slow decline in property values in countries where homeowners are still able to pay their mortgages, the next stage of the crisis might take a lot longer to resolve.

Citi’s new blog scares me (and not just because it has truncated RSS) — Citi

Kaminska nerds out on Deutsche Bank earnings — FT

“43% of the 117 people who drank alcohol before committing their crimes said they had drunk Buckfast” — NYT

No more cheating in Monopoly?! — Parentdish

How Obama is like Bush: Neither can cut agricultural subsidies — Wapo

FSA to banks: your contracts are your problem. Now, stop paying big guaranteed cash bonuses. Or lose your license. — Telegraph

“The dirty secret of long-form journalism is that most of it doesn’t work in any medium.” — Sportsjournalism

Words of wisdom: “My father taught me that if you loan a man too much money, you turn a good man into a bad man.” — Weiss

The Tory election campaign, remixed. Love the Withnail one — MyDavidCameron

Best blog comment ever. “We’ll seek, and we’ll find, and we will never ever yield! This is Harvard!” — HBR

Murdoch on Rusbridger: “it sounds like B.S to me” — PaidContent

In The Black Swan, Nassim Taleb explains his barbell investment strategy:

Instead of putting your money in “medium risk” investments (how do you know it is medium risk? by listening to tenure-seeking “experts”?), you need to put a portion, say 85 to 90 percent, in extremely safe investments, like Treasury bills — as safe a class of investments as you can manage to find on this planet.

Today, he’s saying something rather different:

It’s “a no brainer” to sell short Treasuries, Taleb, a principal at Universa Investments LP in Santa Monica, California, said at a conference in Moscow today. “Every single human being should have that trade.”

Taleb said investors should bet on a rise in long-term U.S. Treasury yields, which move inversely to prices, as long as Bernanke and White House economic adviser Lawrence Summers are in office, without being more specific.

This is Taleb at his most quotable and least helpful. Of course most human beings shouldn’t get involved in shorting anything. What’s more, Larry Summers actually put on that trade — that long-term interest rates would rise — while he was at Harvard, with disastrous consequences. Even no-brainers can lose you billions.

In any case, if 90% of your assets are in safe Treasury bills and a large chunk of the other 10% is being put to use shorting Treasury bonds, essentially what you’re doing is putting on a curve steepener — at a point in time when the curve is already as steep as it’s been in some time. What’s more, unless you’re extremely leveraged, you’re never going to get rich shorting Treasuries. And I’m sure that Nassim would never recommend that kind of leverage.

Taleb isn’t actually giving investment advice here, although it might sound as though he is. He’s just making a rhetorical point that Bernanke and Summers are bound to make some kind of a mistake in trying to steer the US economy — and that such mistakes are likely to result in higher long-term rates. The problem is that, as we saw during the most recent crisis, every so often an economic disaster results in lower long-term rates. So overall I’d say that following Nassim’s investment advice from his book is definitely preferable to following off-the-cuff comments he’s making in Moscow.

Back when Dominique Strauss-Kahn first put himself in the running for the managing director job of the IMF, I said this:

One point in his favor: he’s utterly failed to become president of France, so he’s not going to pull a Horst Köhler and quit to become president of his own country.

It seems I might have spoken too soon:

Dominique Strauss-Kahn, the French politician who heads the International Monetary Fund, said on Thursday he might cut short his mandate, stoking speculation that he wants to run in France’s 2012 presidential election.

His term as managing director of the IMF expires in October 2012, several months after the election, which means the Socialist veteran would have to quit ahead of time if he wanted to challenge President Nicolas Sarkozy at the ballot box.

Clearly DSK doesn’t feel much gratitude towards Sarkozy for getting him the job in the first place. But if this does happen, the Europeans really don’t seem to be doing a very good job with the position: both Köhler and Strauss-Kahn clearly consider it inferior to the national presidency, while Rodrigo Rato, who held the post briefly in between them, quit for mysterious “personal reasons”.

Is this a job which we really want to give to Gordon Brown, who certainly would love it? The answer I think is no. It’s long past time that a non-European held the position; maybe, after living in Paris for the past few years, Angel Gurría counts as being French enough to get the support of at least a few European countries.

Gurría is highly qualified for the job, but I think the main thing now is to set an important precedent and just appoint anybody who isn’t European. Strauss-Kahn himself has told the Brazilian president that he wants to change the selection process for his job. If it ends up going to another European, he’ll have failed.

Stephen Gandel has a good, thought-provoking interview with Roy Smith, a former Goldman banker whose book is available in the UK. His way of looking at both bubbles and busts as being driven by liquidity I think has a lot to be said for it:

There is now about $140 trillion in market capitalization in the word’s financial markets looking for investments. That money can now move around very easily. But even if a relatively small portion of that money goes after something — say, mortgages — it can quickly cause a bubble and a crisis. So all this good work we have done in the past few years to make our capital markets more efficient and open has also made them very hazardous, and we haven’t done anything yet to address that problem.

Here’s Smith’s verdict on the history of Wall Street:

The net result has been a positive for users of capital markets, which can be accessed more cheaply than ever before. But the success of the market has resulted in a vast accumulation of capital in tradable form that is now capable of wrecking whole economies. In 2000 and 2007, financial bubbles did great damage, and the monster is still out there.

Up until now, I’ve thought that the harmfulness of financial innovation was largely a function of its role in enabling regulatory arbitrage. But Smith’s idea I think is stronger. Financial innovation, on this view, is in large part the art of turning illiquid assets into liquid assets. And once an asset is liquid, it’s susceptible to highly-dangerous booms and busts.

The point is that it’s pretty much impossible to have a bubble in something which doesn’t have a liquid asset class supporting it. There’s a good reason that the very concept of a bubble is associated with stocks: stocks are one of the most liquid asset classes in the world. The carry trade is essentially the art of creating bubbles in liquid currency markets. The invention of the mortgage-backed security allowed trillions of dollars to flow into the housing market, where a huge bubble formed. There was a veritable frenzy of trading in Dutch tulips, when they were in a bubble. (Can someone help me out with the Japanese property bubble of the 1980s? What was the driving force behind that?)

It’s not like you can’t lose money where there isn’t a speculative frenzy, of course: banks and insurance companies have been going bust for centuries, after misjudging creditworthiness or losing a gamble when some tail event finally happened. And a lack of liquidity can be just as bad as a surplus of it: if a country has exchange controls and high interest rates, a huge proportion of the money in that country eventually ends up being lent in some form or another to the sovereign, which when it eventually defaults can cause massive economic devastation.

But as Smith says, a world with over $100 trillion in liquidity is by its nature a world prone to bubbles: a tiny slosh of that money in a certain direction can cause massively destabilizing effects in formerly-sleepy corners of the market. And the explosive growth of ETFs, which can turn all manner of fixed-income, commodity, and currency asset classes into liquid and bubble-prone stocks, only makes matters worse.

The monster is still out there — and the monster is growing, as sovereigns with trillions of dollars of disposable wealth at their disposal look for asset classes to invest that wealth in, and as Wall Street continues to extoll its ability to corral multi-billion-dollar financing deals by doing clever things in the capital markets. What’s more, it’s far from clear that regulators even have the ability to identify bubbles, let alone to prevent them growing to destabilizing levels. George Soros said in Davos that he loves identifying bubbles and then jumping on the bandwagon and making lots of money. Can anybody hope to stop him?

Michael Pettis does a good job of systematically dismantling this idiotic line from Tom Friedman:

First, a simple rule of investing that has always served me well: Never short a country with $2 trillion in foreign currency reserves.

In fact, if you decided to short only countries whose foreign exchange reserves reached some large proportion of gross world product, you’d be batting 2 for 2 right now as you started shorting China. First you would have shorted the USA in the 1920s, and then you would have shorted Japan in the 1980s.

Writes Pettis:

It was the very process of generating massive reserves that created the risks which subsequently devastated the US and Japan. Both countries had accumulated reserves over a decade during which they experienced sharply undervalued currencies, rapid urbanization, and rapid growth in worker productivity (sound familiar?). These three factors led to large and rising trade surpluses which, when combined with capital inflows seeking advantage of the rapid economic growth, forced a too-quick expansion of domestic money and credit.

It was this money and credit expansion that created the excess capacity that ultimately led to the lost decades for the US and Japan. High reserves in both cases were symptoms of terrible underlying imbalances, and they were consequently useless in protecting those countries from the risks those imbalances posed.

One of the scariest aspects of the most recent financial crisis is that far from addressing the biggest and most potentially destabilizing global imbalances, it actually exacerbated them. If and when those imbalances unwind chaotically, the global effects will be highly unpredicatable. But it’s far from clear that China will be any kind of safe haven.

The most ridiculous sentence I’ve read today comes from Goldman Sachs, protesting against proposals that money-market funds should be marked to market. But first let’s remember what Goldman CEO Lloyd Blankfein has to say about marking to market:

For Goldman Sachs, the daily marking of positions to current market prices was a key contributor to our decision to reduce risk relatively early in markets and in positions that were deteriorating. This process can be difficult, and sometimes painful, but I believe it is a discipline that should define financial institutions. We mark-to-market, not because we are required to, but because we wouldn’t know how to assess or manage risk if market prices were not reflected on our books.

Now read this, from his employee James McNamara:

We do not believe that disclosing shadow prices or market-based prices of portfolio securities would be informative to investors… Investors who perceive a NAV differential between two money market funds may wrongly assume that the fund with the lower market NAV is experiencing a material credit or liquidity problem. This may result in destabilizing — and unnecessary — levels of redemption activity in that fund, which could infect other funds managed by the same adviser or other funds as well. The Commission should be mindful of this type of unintended consequence before adopting regulations mandating the disclosure of market-based NAV’s and market-based pricing of portfolio securities.

When Goldman Sachs reduces its positions as a result of declining market prices, then, that’s a necessary, if difficult and sometimes painful, discipline. When investors in money-market funds do the same thing, however, that’s destabilizing and unnecessary. Alles klar?

David Reilly makes short shrift of such hypocrisy in his column today, and adds something important:

The industry’s case against floating values is that investors would pull cash out of money-market funds because they want investments with a stable value. That, the argument goes, would deprive American companies of a vital source of funding, since money-market funds are big buyers of short-term commercial paper issued by companies.

That is a well-worn ploy from the financial-services industry to counter any change that cuts into business. Banks used this tactic effectively in 2003 and 2004, for instance, to pressure the Financial Accounting Standards Board to water down rules that would have limited banks’ ability to use off-balance- sheet vehicles.

The result was out-of-control securitization and under- capitalized banks, both of which played huge roles in crashing the financial system.

The fact is that higher short-term funding costs for large corporations are a feature, not a bug, in terms of moving money-market funds to floating NAVs. Goldman might like to bellyache about “the diminished supply of short-term credit to corporations” that might result, but short-term credit is always the most systemically-dangerous form of credit, since it can dry up with no warning and cause a major liquidity crisis.

More generally, it’s both silly and far too easy for banks to cry “more expensive credit!” every time that anybody proposes tightening regulations on anything from credit cards to prop trading. Yes, it is true that decades of financial-sector deregulation led to cheaper credit, in the financial industry, in the housing market, in the private-equity world, and elsewhere. This was not a good thing. $1 NAVs obscure the risks inherent in money-market funds, and a sensible regulatory overhaul would put an end to them.

Bento, from Ultimi Barbarorum, doesn’t have an FT subscription, and as such is prone to running into its paywall. Recently, however, he’s noticed something odd: when he visits the FT after having reached his quota limit, the page loads fully — including all of the ads on it — and then the paywall popup appears, preventing him from reading it. He wondered: does this mean that advertisers are being charged when the FT serves up impressions that can’t be seen?

I asked FT.com publisher Rob Grimshaw about this, and he said that yes, that has been happening since “the final few weeks of last year”. The fix, he says, is going to be a two-stage process. First, he’ll “take temporary steps to ensure that all campaigns on the site receive a full quota of unobscured impressions”. Second, he’s going to move the paywall popup, “so that it only obscures the portion of the page below the ad position”.

You’ve got to admire the chutzpah here: the FT is happy to prevent would-be readers from seeing its stories, but it’s going to make sure those readers can still see its ads — the equivalent of giving magazines away if you’re happy to read a version where all the editorial content is redacted and only the ads remain.

The problem, of course, is that the FT’s advertisers are buying inventory based on the idea that their ads are being served up against high-value FT content, as opposed to a negative-value paywall popup. Does any advertiser really want to send a message of “this paywall is brought to you by IBM”? It seems, if they’re going to continue to buy space on FT.com, that they might not have any choice in the matter.

Paul Volcker’s long NYT op-ed last weekend, and his testimony to the Senate banking committee this week, did very little to clear up a lot of the uncertainty over what exactly the Volcker rule comprises. That was probably deliberate, given the degree to which Chris Dodd is skeptical that any such rule can be implemented at all. But the contours of a Volcker rule are slowly emerging all the same, and that they carve out two enormous loopholes.

Firstly, the Volcker rule seems to apply only to depositary institutions: if you don’t take deposits, then you’re exempt. The result is that it’ll be easy for Goldman Sachs and Morgan Stanley to get around the rule just by returning their current (tiny) deposit base and voluntarily withdrawing from access to the Fed’s discount window.

But the point here is that banks with deposit bases are already insured and regulated, by the FDIC. The definition of a bank isn’t an entity which takes deposits; it’s an entity which borrows short and lends long. So long as the likes of Goldman Sachs can fund themselves in the wholesale market and continue to lend money to large clients in things like the syndicated loan market, they’re banks, and they should be subject to rules like Volcker’s which apply to banks.

Secondly, it seems that banks might be allowed to continue to own hedge funds, private-equity funds, money-market funds, and the like, just so long as they’re run for clients, with client money, rather than being vehicles for the investment of the bank’s own capital.

This too is dangerous, because the history of the financial crisis is clear: Bear Stearns ended up bailing out its internal hedge funds even when it didn’t legally have to. Large banks ended up bailing out clients who invested in auction-rate securities. Fund managers ended up putting up their own capital to stop money market funds from breaking the buck. Banks with SIVs ended up bringing them onto their own balance sheet, taking enormous associated losses. Etc etc. Essentially, a bank might say that it has no exposure to such things, and that all the risk lies with its investing clients. But that’s never, ever true.

So while I think that the Volcker rule is a good idea, I also think that it has already been diluted to a point at which it will do very little good. If prop trading is a problem, it’s much more of a problem at Goldman Sachs than it is at Wells Fargo — yet the Volcker rule would apply to Wells Fargo and not to Goldman Sachs. Similarly, if owning hedge funds is a problem, it’s a problem whether or not the bank’s capital is nominally invested in the fund, but the Volcker rule gives banks an easy way to wriggle out from under it, simply by withdrawing their own investment.

So my feeling is that the Volcker rule probably won’t make its way into law, and that it’ll be largely toothless if it does. A shame.

Why single women eat salad — Guardian

Investment banking turns gay — Hedgeco

Have psychologists overcome the Monty Hall Problem? — NYT

Global Policy, which could be a very good magazine, has the most user-unfriendly, lousy-with-flash website I’ve seen in a very long time — GP

“It’s easier to read this when I imagine the steam pouring out of Ryan Avent’s ears as he reads it” — Rortybomb

After selling for $6,350, A Tool to Deceive and Slaughter is now back on sale with a minimum bid of $6,858 — eBay

10-year venture returns look ugly — Azeem

Martin Wolf in a codpiece — FT